December 23, 2009 - Japan, the world’s fourth-largest cigarette market, will raise tobacco taxes for the first time in four years as the government faces a tax revenue shortfall and tries to discourage smoking.

The Cabinet approved a plan to raise the duty by 3.5 yen (4 cents) per cigarette from October 1, 2010, with tobacco companies charging an extra 1.5 yen each. A pack of 20 cigarettes would increase by an average 100 yen (USD 1.09), or 33 percent, to 400 yen (USD 4.37).

The tax increase, the biggest since Tokyo-based Japan Tobacco (JT) Inc. was privatized in 1985, is part of Prime Minister Yukio Hatoyama’s pledge to discourage smoking to curb health insurance costs as the population ages. Japan Tobacco, the world’s third-largest publicly traded cigarette maker, may raise prices by more than the tax gain to offset an expected drop in smoking rates, President Hiroshi Kimura said this month. The increase is the fifth since 1985. The previous four tax increases ranged between 0.82 yen and 0.9 yen per cigarette.

“The government will probably keep increasing the tax and more people will stop smoking,” said Mitsuo Shimizu, a market analyst at Cosmo Securities Co. in Tokyo.

“I will proactively consider quitting” because of the tax change, Masato Takano, a 36-year-old restaurant owner in Tokyo, said in an interview. “It’s a sign of the times, as bans on smoking in public areas are also expected to increase.”

The smoking rate among men in Japan dropped to 36.8 percent in 2008 from 46.8 percent in 2003, according to the nation’s health ministry. About 9.1 percent of women smoked last year, compared with 11.3 percent in 2003. The ministry estimates the smoking rate among men may fall to as low as 27.1 percent should the price of a pack be raised to 500 yen (USD 5.46). (JT’s Annual Survey (conducted in May 2009) finds 24.9% of Japanese Adults Are Smokers.)

Still, Hatoyama needs to find ways to raise funds to boost aid to households while restraining the nation’s expanding debt. Budget requests from ministers amounted to 95 trillion yen for the year starting April 1, while tax revenues dropped to 36.9 trillion yen this year. Finance Minister Hirohisa Fujii said December 15 that he aims to boost non-tax revenue.

The decision to raise the tobacco tax comes as Japan's three-month-old government struggles to keep a lid on the country's mounting public debts. The Organisation for Economic Cooperation and Development has warned that Japan's public debt is set to soar to more than 200 percent of gross domestic product by 2011.

Japan Tobacco said in April it plans to shut three cigarette factories in the country by March 2011 as demand wanes. The tax increase “may lead us to consider more restructuring,” President Kimura said Dec. 4 in Tokyo. Japan’s central and regional governments get about 1 trillion yen each in tax revenue each year from tobacco, according to Ministry of Finance figures.

Japan Tobacco, maker of Mild Seven and Benson & Hedges cigarettes, got 52 percent of its revenue from cigarettes sales in Japan in the six months ended September 30, it said in October. About 41 percent of sales came from selling cigarettes in overseas markets. The company’s food sales accounted for about 6.6 percent of the total, while less than 1 percent came from its drug division.

Japan ranked fourth in cigarette consumption by volume after China, the U.S. and Russia in 2007, according to ERC Group, a U.K.-based market researcher.